It is likely to target the mobile phone sector and expansion in the UK, the Far East and the Americas.

The deal, which was finally confirmed on Tuesday, will create the world's second largest telephone company with a value of $172bn.

Only Japan's NTT is bigger.

Telecom Italia chief executive Franco Bernabe said that the combined company would not be either a 'dinosaur or a Eurosaur' but a flexible and technologically advanced pan-European powerhouse.

Ron Sommer, the Deutsche Telekom chief executive, told a joint press conference that mobile phones, Internet services, and high-speed ISDN and ADSL links would drive future company growth.

Takeover speculation immediately centered on the US long-distance operator Sprint, which is already part of a global alliance with Deutsche Telekom, and the UK's Cable and Wireless, with its extensive Internet interests and Far Eastern presence.

Merger of equals

Under the terms of the deal, Deutsche Telekom shareholders, including the German government, will hold 56% of the combined company, with Telecom Italia shareholders owning 44%.

The two chief executives said they planned to share the role of boss of the new company, switching positions each year, with a board made up of equal numbers from Italy and Germany. The new company - which is currently un-named - will have two headquarters, in Bonn and Rome, and will use English as a working language.

The German government currently owns 75% of Deutsche Telekom, a stake it says it wants to reduce during the coming years.

The German government owns seventy five percent of Deutsche Telekom

Telecom Italia said its board was satisfied with assurances by the German government that it would not interfere in a new company created by the deal.

The plan values Telecom Italia at $81bn and upstages a $65bn hostile bid from Olivetti. It offers a 21% premium on TI's earlier share price.

Now the deal will have to be sanctioned by Telecom Italia's shareholders and European and national competition authorities.

The two companies said they hoped to complete the merger by the end of 1999, with cost savings of up to $1bn a year.

Mr Bernabe said that although further job cuts could not be ruled out, he hoped that the overall impact on employment would be positive.

German investors remained sceptical of the deal, with Deutsche Telekom shares falling by 3% in early trading in Frankfurt.

Historic corporate link-up

The proposed merger will rank among the largest corporate deals ever.

It would dramatically alter the corporate landscape of Europe and revolutionise the telecommunications industry.

The new entity would be the world's largest operator in terms of market capitalisation and number of fixed lines and the second based on international traffic volumes and domestic mobile phone subscribers.

It would have 300,000 employees and sales of $71bn.

The company has operations in 22 countries and 109m customers.

EU objections

However the European competition commissioner, Karel van Miert, has already said that the deal will come under close scrutiny from the regulators.

Both companies may have to sell their holdings in many markets in order to get the commission's approval.

"Brussels has to check this deal very thoroughly and that would take at least a half a year. It would be a year of uncertainty for investors," said Michael Schatzschneider, telecoms analyst at BHF Bank in Frankfurt.

French objections could be another obstacle to the deal.

France Telecom has already told its partner Deutsche Telekom that strategic agreements between them could be threatened if the German company strikes up an alliance with Telecom Italia.

France Telecom and Deutsche Telekom are strategic partners in the loss-making alliance Global One, along with US operator Sprint, and have a string of other European joint ventures.